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Friday, October 8, 2010

Project Selection Method

Most organizations have a formal, or at least semi-formal, process
for selecting and prioritizing projects. Selection methods measure the
value of what the product, service, or result of the project will
produce and how it will benefit the organization. Selection methods
involve the types of concerns executive managers are typically thinking
about. This includes factors such as market share, financial benefits,
return on investment, customer retention and loyalty, and public
perceptions.

There are generally two categories of selection methods: mathematical models (also known
as calculation methods) and benefit measurement methods (also known as decision models).
Decision models examine different criteria used in making decisions regarding project selection,
while calculation methods provide a way to calculate the value of the project, which is
then used in project selection decision making.

Mathematical Models
Mathematical
models uses linear, dynamic, integer, nonlinear, and/or multi-objective
programming in the form of algorithms or in other words, a specific set
of steps to solve a particular problem. Organizations considering
undertaking projects of enormous complexity might use mathematical
modeling techniques to make decisions regarding these projects.

Cost-Benefit Analysis, compares the cost to produce the
product, service, or result of the project to the benefit that the
organization will receive as a result of executing the project.

Scoring Models, decides on the criteria for example, profit
potential, marketability of the product or service, ability of the
company to quickly and easily produce the product or service, and so on.
Each of these criteria is assigned a weight depending on its importance
to the project committee. More important criteria should carry a higher
weight than less important criteria.

Benefit Contribution Methods

Cash Flow Analysis Techniques

Payback PeriodPayback period is the length of time it
takes the company to recoup the initial costs of producing the product,
service, or result of the project. This method compares the initial
investment to the cash inflows expected over the life of the product,
service, or result.

Discounted Cash FlowsDiscounted cash flow uses Present
Value (PV) formula for selection purposes or when considering
alternative ways of doing the project. It will select project with the
highest investment to the company.

Net Present Value (NPV)The company expects to receive
revenues, or cash inflows, from the resulting project. NPV allows you to
calculate an accurate value for the project in today’s dollars.
Projects with high returns early in the project are better projects than
projects with lower returns early in the project.

Internal Rate of Return (IRR)IRR is the discount rate
when the present value of the cash inflows equals the original
investment. When choosing between projects or when choosing alternative
methods of doing the project, projects with higher IRR values are
generally considered better than projects with low IRR values.

Economic Models.Project selection based on the economic value among the projects.